The Trade Deficit with China: Up Sharply for Those Who Care

With Donald Trump declaring a truce in his "trade war" with China, it might be a good time to check the charts. According to data from the Commerce Department, the US trade deficit with China was $91.9 billion in the first three months of 2018. That's up from $78.8 billion in 2017 and $77.9 billion in 2016.

There are problems with this figure, as many people have noted. First, it is overstated due to the fact that we count the full value of a product exported from China, even though it may have just been assembled there, with most of the value originating elsewhere. The classic example is an iPhone, where the phone is assembled in China, but the bulk of the value is from items and intellectual property that are imported to China.

This is a real problem with the Commerce Department data, but there is also an analogous issue on the other side. Many of the goods we import from the European Union, Japan, and other countries have components that were made in China. My guess is that the net would still imply a reduction in our trade deficit with China, but probably not a huge one.

The other big issue is that many intellectual products never appear in our exports at all. When Apple contracts with Foxconn to produce its phones with China, the value of its software is not counted as an export. Some of this is due to inherent difficulties in measurement. (If Apple licensed Foxconn to produce the phones, the license would show up as export.) Some of the problem is due to tax avoidance, where companies attribute the value of the intellectual work to tax havens like Ireland, even if it was actually performed in the United States.

In any case, these problems in measurement are longstanding and almost certainly do not affect the direction of change. So as it stands now, Trump has taken us $13.1 billion deeper in the hole in terms of our trade deficit with China ($52.4 billion on an annual basis) compared to where things sat when he took office. We'll see how things change following the truce.